Southeast Asia — a region with ten unique countries with diverse cultures, religions, and political frameworks — offers many opportunities to businesses that can successfully navigate the myriad of deeply entrenched compliance challenges. With a growing middle class, a well-educated population, and an expanding business sector, Southeast Asia has grown at a remarkably consistent pace over the past ten years. 2019 saw the Association of Southeast Asian Nations (ASEAN) achieve a combined GDP of USD 3.1 trillion, making it the world’s fifth-largest economy. By 2030, it is expected to be the fourth largest.
As the world’s supply chains look for alternatives to China, countries such as Indonesia, Cambodia, Thailand, and Vietnam look particularly appealing with the ongoing privatization of state-owned entities and significant private sector investment. Much of Southeast Asia has been remarkably successful in coping with the Covid-19 pandemic. Vietnam, in particular, has one of the lowest levels of infection globally, due in part to early lockdown and restrictions on travel.
But while there is much to celebrate, businesses considering the region must be prepared to tackle some significant risks, ranging from corruption to human rights violations. In our latest spotlight, we take a look at how businesses can manage compliance risk in Southeast Asia, offering practical solutions and use cases to support successful regional strategies.
Compliance Roadblocks – The Main Challenges
Corruption has deep roots in Southeast Asia, with many entrenched practices reaching the top levels of society. Malaysia’s 1MDB scandal is a case in point, involving the former Prime Minister, Najib Razak. With most member countries ranking in the lower half of Transparency International’s Corruption Perception Index, businesses must be prepared to encounter bribery and corruption issues particularly in relation to public sector contracts. Malaysia, Thailand, Indonesia, and the Philippines are considered high-risk countries, while sectors such as waste management, healthcare, and real estate experience high levels of corruption.
Similarly, money laundering remains a major issue in the region as most countries operate predominantly cash-based economies. Compounded by weak legal frameworks and a lack of regulatory structures, organized crime groups launder ill-gotten gains from the trafficking of drugs, people, counterfeit goods, and other commodities. There is also a significant lack of transparency in the region regarding who is “behind” companies, with Thailand and Cambodia ranking among the most secretive. Beneficial ownership information is still sorely lacking in many countries despite moves to improve its availability.
Culturally, each country in the ASEAN region has its own practices and nuances running in parallel with country-specific legislation. Each must be treated with respect, and blanket policies or procedures may not be appropriate to use in the region. Reflecting local complexities in compliance programs will ensure they are suitable and fit for purpose, achieving the best possible outcomes for your business.
Finally, environmental, social, and governance issues (ESG) can cause headaches for compliance professionals, especially in light of increasing global legislation. Tackling modern-day slavery and human rights abuses in existing and new supply chains is top of the compliance agenda, but the region is fraught with issues ranging from forced labor and human trafficking to land rights violations and green financial crime. The manufacturing, mining and construction industries are particularly vulnerable to human rights issues, and businesses must be particularly cautious. Identifying violations and blind spots is complicated and time consuming no matter which industry you operate in, requiring swift responses and preventative measures to be in place to prevent reoccurrence.
Practical Steps To Manage Southeast Asian Risks
As these emerging markets continue to grow and receive increasing investment, compliance teams must be prepared to take robust steps to meet these compliance challenges head on, supported by appropriate terms and conditions. This may include:
- Meeting the prospective joint venture partner or third-party agent — In a post-Covid-19 world, this is still an important step to assess the suitability of your vendor, even if done virtually. Sharing compliance best practices and expectations can start a relationship off on the right foot.
- Asking questions about the ultimate beneficial owners — Whether it is joint venture partners, main subsidiaries, or top principals, asking for more information on ownership structures is the first step in improving transparency and protecting your business from serious regulatory issues.
- Verify your staff and partners — Research into your new employees and third-party vendors is crucial to identify red flags, such as sanctions exposure and politically exposed persons. Internal or external due diligence and employee screening should form the backbone of your compliance program, supported by site visits where this is possible.
- Conduct an ethical audit of your supply chain — Taking an analytical approach to your ESG risks will identify issues of concern including how an entity treats its employees, risks associated with resources, and labor rights abuses.
Three Use Cases In Successfully Navigating Risk
IntegrityRisk opened its Hong Kong office in 2019, having identified a need for expert due diligence in the wider region. Led by industry veteran Iain Johnston, we help clients manage Southeast Asia focused investigations involving bribery, corruption, and malfeasance.
Here are three recent use cases of how we’ve helped our clients achieve successful outcomes:
A Whistleblower Investigation in Thailand — Our client received a whistleblower alert about internal bribery and corruption amongst key local staff based in its Bangkok office. We conducted appropriate local research and investigation of more than a dozen subject individuals to identify any connection to the alleged illicit activity. Via local research, discreet inquiries, and various site visits, we were able to determine that several local employees were, in fact, engaged in inappropriate relationships .
Pre-Investment Research in Vietnam — Our client in the financial sector was contemplating a significant investment in a Vietnamese entity active in the real estate sector with ties to the government. We completed expedited enhanced due diligence and local source inquiries into the background and reputation of the subject company and more than eight principals/board members. Our findings uncovered some risk factors requiring additional inquiries before our client was comfortable moving forward with the transaction.
Due Diligence in Indonesia — We were instructed to conduct a local due diligence investigation into one of the largest healthcare companies in Indonesia. Certain principals were politically exposed persons and, therefore, required more scrutiny. We determined a number of “red flags” for this entity, including prior bribery and corruption activity for one key principal. Our client passed on participating in this transaction, avoiding serious regulatory issues.
Contact us today to assess your Southeast Asian compliance risks and confidently position your business ahead of risk.